As reported in our previous speedbrief, the Department for Work and Pensions (DWP) issued a consultation paper in October 2014 on draft regulations concerning the governance of workplace pension schemes providing money purchase benefits (WPPs), as well as the introduction of a 0.75% charge cap on default funds offered by WPPs which are “qualifying schemes” for auto-enrolment purposes.
The Government response to the consultation has now been published. The bulk of the original proposals remain unchanged, but the Government has made some revisions in light of concerns raised during the industry consultation. Subject to Parliamentary approval, it is intended that the majority of the new regulations will come into force on 6 April 2015.
Although these regulations apply only to occupational WPPs, employers and providers who offer contract-based WPPs should be aware of the separate requirements for independent governance committees for contract-based schemes (IGCs), which need to be established by 6 April 2015. Helpfully, the DWP has worked closely with the FCA and the Pensions Regulator in developing the new minimum governance standards for occupational WPPs, and the intention is that these standards will be consistent with the requirements for IGCs, where appropriate. For more information on the IGC requirements, click here.
The original proposals
By way of reminder, the Government proposed in the consultation paper that (subject to certain limited exceptions) new quality standards should apply across all WPPs, and also to money purchase sections of hybrid schemes. These standards would oblige trustees to:
- design default arrangements in members’ best interests;
- keep default arrangements under regular review;
- ensure that core financial transactions (e.g. investment of contributions, changes of investments and transfers) are processed promptly and accurately; and
- assess the extent to which any costs and charges borne by members represent good value.
Schemes to which the governance standards applied would be required to have a Chair of trustees, and to issue an annual Chair’s Statement reporting on compliance with the governance standards. (For more information on the new responsibilities for the Chair of trustees, see our separate speedbrief here.)
Provisions in scheme rules requiring trustees to use a particular provider for administrative, fund management, advisory or other services would be banned.
Additional governance requirements were also proposed for all “master trust” arrangements. The Government proposed that these schemes would be obliged to have a minimum of three trustees, the majority of whom (including the Chair) should be independent of any company providing advisory, administration, investment or other services to the scheme.
The final provisions
Unsurprisingly, the key policy proposals in the original consultation draft remain unchanged, so the requirements summarised above will apply from 6 April 2015. However, the drafting of the final regulations has been clarified in various respects – for instance:
- the requirement for the trustees to appoint a Chair of trustees will only apply where the scheme does not already have a Chair in place (this is intended to ensure that the regulations dovetail with existing scheme rules and processes for the appointment of a Chair);
- following representations from affected schemes, there will be a temporary exemption from the new master trust provisions for certain (mainly ex-public sector) multi-employer schemes that are established by statute, whilst the Government considers what governance requirements should apply to this specific category. The exemption will expire in April 2016.
It is worth noting that a number of concerns raised in the consultation responses from the industry have not resulted in any changes to the final legislation. These include (for instance) the difficulty for trustees of assessing value for money; or the fact that where two or more employers participating in a group-wide multi-employer scheme are sold, and so cease to be “connected” with the rest of the group, the scheme may become a “master trust” (and so would become subject to additional governance requirements), even if the exiting employers do not actively participate in the scheme after the sale.
The original proposals
The two core proposals in relation to charges were the 0.75% annual cap on charges in relation to funds under management, and the prohibition of active member discounts (AMDs).
In relation to these two areas, the Government proposed that:
- from April 2015, trustees should be required to ensure that the default funds of “qualifying schemes” (i.e. money purchase schemes used to meet an employer’s auto-enrolment obligations) meet the charge cap requirement;
- the charge cap requirement should apply to all funds under management (ie. not just those built up after April 2015 or the employer’s staging date) and to all member-borne charges and deductions, excluding transaction costs;
- for these purposes, a “default” fund would be any arrangement into which contributions are directed without a member having made an active choice, and also any arrangement into which 80% of an employer’s workers are contributing;
- the cap should apply to a member’s funds in aggregate, so either single or dual charging structures can be used, so long as the overall charge is within the 0.75% ceiling (however, any more complex charging structures are prohibited);
- trustees should be able to invoke an “adjustment measure” to ensure compliance with the cap, including (for example) diverting contributions to a fund that complies with the cap; and
- from April 2016, AMDs should be banned, though employers may still subsidise member charges on behalf of current employees, provided that the headline level of charge (ignoring the subsidy) is the same for contributing and non-contributing members.
The final provisions
Again, the Government’s response to the consultation largely retains the original proposals unchanged – so most of the requirements summarised above will need to be met from 6 April 2015 (2016 for the ban on AMDs). Key points of movement include:
- a new exemption for single-member schemes has been included;
- the proposed exemption for WPPs which contain a third party promise has been narrowed so that it applies only where the promise relates to benefits payable from from the default fund;
- the definition of “default” fund has been clarified, so that only members who are accruing money purchase benefits other than AVCs will be considered when assessing (for instance) whether the 80% threshold is met;
- costs associated solely with the provision of death benefits have been excluded from the charge cap; and
- the wording of the AMD ban has been altered to make it clear that it applies to all forms of charging structure (and not just those which are permissible for the purposes of the charge cap).
Since the October consultation was presented very clearly as a technical consultation, it is unsurprising that the main policy thrust of the Government’s proposals remains unchanged. Now that final regulations have been laid, trustees of affected schemes will need to take swift action in order to ensure that they are able to comply with the new requirements applying from 6 April 2015.
Given all the changes stemming from the new DC pension flexibilities – which will also take effect from 6 April – trustees of money purchase schemes will therefore have a great deal to get to grips with over the next 6 weeks or so. Their task will not be made any easier by the fact that some key parts of the relevant implementing legislation for the pension flexibilities are still not yet on the statute books. It is to be hoped that the Pensions Regulator will take account of these extenuating circumstances when dealing with any cases of non-compliance arising during the early weeks of the new regime.